Bermuda: Economic Substance Requirements In Bermuda, The British Virgin Islands And The Cayman Islands (September 2019)

Last Updated: 11 October 2019
Article by Fiona Chan and Shana Simmonds

New economic substance legislation (ES Legislation) in each of Bermuda, the British Virgin Islands (BVI) and the Cayman Islands came into force on 31 December 2018 (in Bermuda) and 1 January 2019 (in the BVI and the Cayman Islands) which requires certain "relevant entities" carrying on any "relevant activity" in one of these jurisdictions (in each case as such terms are defined in the ES Legislation of that jurisdiction) to demonstrate adequate economic substance in that jurisdiction.

The ES Legislation was adopted in response to concerns expressed by the Council of the European Union (EU) about the absence of economic substance requirements (ES requirements) for entities doing business in and through these jurisdictions.

This article sets out the latest ES Legislation developments in these jurisdictions since the publication of our previous summary of such legislation on 14 May 2019.

latest developments in bermuda

Bermuda Removed from EU "Blacklist"

The EU confirmed on 17 May 2019 that Bermuda has been removed from its list of non-cooperative jurisdictions for tax purposes (blacklist) and placed on a list of jurisdictions which, in the words of the EU "have taken many positive steps to comply with the requirements under the EU listing process, but should complete this work by the end of 2019 to avoid being blacklisted next year" (greylist).

Bermuda has now joined the BVI and Cayman Islands on the greylist, meaning that these jurisdictions are considered to be cooperative and thus not subject to any EU sanctions.

Economic Substance Amendment Act 2019

Bermuda's Economic Substance Amendment Act 2019 became operative on 28 June 2019. It creates an exemption for entities that are resident for tax purposes in a jurisdiction outside of Bermuda, provided that jurisdiction is not itself on the EU blacklist. Similar exemptions were already available under the ES Legislation of the BVI and the Cayman Islands.

The Registrar of Companies (RoC) will provide information received from an entity in support of its claim to non-resident status to the foreign competent authority of the jurisdiction where the holding entity, the ultimate parent entity, an owner or the beneficial owner of the entity making that claim is incorporated, formed and registered or resident.

Draft Bermuda Guidance Notes

On 26 June 2019, the RoC released for discussion draft Economic Substance Requirements – Draft Guidance Notes – General Principles (Bermuda Guidance Notes).

The Bermuda Guidance Notes are intended to assist entities in determining whether they are within scope of the ES requirements and, where entities are in scope, to provide guidance on how these requirements may be satisfied.

Key points to note from the draft Bermuda Guidance Notes are the following:

  1. The RoC is in the process of building an e-registration system to accept and manage the information and data collected under Bermuda's ES Legislation and this system is scheduled to launch in the second quarter of 2020.
  2. Where the ES requirements obligate a relevant entity to manage and direct a relevant activity in Bermuda, the Roc will assess whether the entity (a) holds meetings in Bermuda where strategic or risk management and operational decisions are made ("key decisions"), and (b) has an adequate number of senior executives, employees or other persons in Bermuda who are suitably qualified and responsible for oversight or execution of the entity's core income-generating activities. The RoC would normally expect at least a majority of such key meetings to be held in Bermuda or, for a relevant entity with a minimum level of activity, at least one key meeting in each relevant financial period.
  3. A relevant entity's core income generating activities with respect to any relevant activity must be undertaken in Bermuda.

latest developments in the BVI

Economic Substance (Companies and Limited Partnerships) Act, 2018 – section 16

On 28 June 2019, the BVI gazetted a Notice (SI No. 41 of 2019) under BVI's Economic Substance (Companies and Limited Partnerships) Act, 2018 (as amended, BVI ES Act). The Notice has delayed the coming into force of section 16 of the BVI ES Act from 30 June 2019 to 1 October 2019. Section 16 effects amendments to BVI's Beneficial Ownership Secure Search System Act (BOSS Act). The Notice does not, however, affect the deadline for compliance with ES requirements or the filing of requisite information under BVI's ES Legislation.

As a result of the above Notice, the Beneficial Ownership Secure Search System (Amendment) Act, 2019 will now also come into force on 1 October 2019 (as it is stated to come into force upon section 16 of the BVI ES Act coming into force). This amendment, among other things, clarifies that the BOSS Act does not apply to limited partnerships without legal personality.

BVI Finance advised its members on 10 September 2019 that amendments to the BOSS Act were passed in the House of Assembly on 2 August 2019, that the amendments include matters related to economic substance and that further amendments to the BOSS Act are being considered and are expected to be made in upcoming sessions of the House of Assembly. Once these amendments have been gazetted, we will provide a further update in due course.

Draft Code

On 22 April 2019, the BVI's International Tax Authority (ITA) published for discussion a draft Economic Substance Code (Code).

The draft Code is intended to provide BVI entities with helpful general guidance to the operation of BVI's ES legislation.

Key points to note from the draft Code are the following:

  1. Investment funds are not subject to ES requirements unless, besides being an investment fund, they carry on any relevant activity within scope of the BVI ES Act.
  2. Where the ES requirements obligate a relevant entity to manage and direct a relevant activity in the BVI, it should be noted that such obligation relates to the activity rather than the entity as a whole. However, if the entity's only business is a relevant activity or relevant activities, then the entity itself must be managed or directed in the BVI. The draft Code does not impose any requirement that directors be BVI residents, but it does state that there must be an adequate number of board meetings held in the BVI (which in turn would require a quorum of directors to be present at such meetings).
  3. The lists of core income generating activities set out in the BVI ES Act (and which must be conducted in the BVI in respect of any relevant activity other than the business of a pure equity holding company) will not be treated as exclusive. The ITA will look to ensure, on a case-by-case basis, that the core income generating activities in respect of any relevant activity are carried out in the BVI.

BVI Finance advised its members on 10 September 2019, that the Code is being recast in the form of Rules and that these Rules will be accompanied by explanatory notes to be issued pursuant to the BVI ES Act's section 17, which empowers the ITA to issue rules on how the ES requirements may be met. BVI Finance expects the content of the Rules to remain substantially the same as the content of the Code and anticipates the ITA will issue the Rules and explanatory notes on 30 September 2019. Once the Rules (and explanatory notes) have been published, we will provide a further update.

latest developments in the CayMan IslANDS

International Tax Co-operation (Economic Substance) Law, 2018 – Amendment of Schedule

On 30 April 2019, the Cayman Islands' International Tax Co-operation (Economic Substance) Law, 2018 (Cayman ES Law) was amended, among other things, to include in the definition of fund management those persons "otherwise authorised" to conduct business under the Cayman Islands' Securities Investment Business Law (SIBL). The effect of the amendment is to capture "excluded persons" (entities excluded from SIBL's licensing requirements) who would otherwise fall outside of scope of the Cayman Islands' ES Legislation by virtue of not being fully licensed under SIBL. By way of the Securities Investment Business (Amendment) Law, 2019, which came into force on 18 June 2019, the "excluded persons" regime under SIBL has been replaced with a "registered persons" regime which requires that such persons be registered with the Cayman Islands Monetary Authority (CIMA). Under transitional provisions, "excluded persons" who wish to be registered as "registered persons" must do so by 15 January 2020 (15 August 2019 was the deadline for "excluded persons" who wish to be so registered to provide CIMA with such information as CIMA may request).

Cayman Guidance Notes

On 30 April, 2019, the Cayman Islands Tax Information Authority (TIA) released updated Guidance Notes – Economic Substance for Geographically Mobile Activities-version 2.0 (Cayman Guidance Notes) to supplement the Cayman ES Legislation. Version 2.0 replaces version 1.0 issued on 22 February 2019.

Key points to note from the Cayman Guidance Notes are the following:

  1. Cayman entities that have elected to be treated as a disregarded entity for United States of America tax purposes and have a United States of America parent company are not relevant entities under the Cayman ES Legislation. Satisfactory evidence to this effect must be provided to the TIA.
  2. A relevant entity's core income generating activities with respect to any relevant activity must be undertaken in the Cayman Islands.
  3. The term "investment fund" includes the investment fund itself and also any entity through which an investment fund directly or indirectly invests or operates (but not an entity that is itself the ultimate investment held). For the avoidance of doubt, the words "through which an investment fund directly or indirectly invests or operates" refer to any entity which functions solely as part of the investment fund structure which is not carrying on an operating business (i.e. its purpose is passive in nature).

Industry Update from the Department of International Tax Cooperation

In an industry update circulated on 26 July 2019, the Cayman Islands' Department of International Tax Cooperation (DITC) advised, among other things, that version 3.0 of the Cayman Guidance Notes is currently being drafted and that version 3.0 will include sector-specific guidance for each relevant activity, as well as guidance for investment funds. Working groups from the industry for each sector have been arranged with a view to obtaining their feedback on draft sector-specific guidance. Working group meetings commenced at the end of August 2019, with version 3.0 to be published following this consultation process.

APPLEBY ECONOMIC SUBSTANCE ONLINE TOOL AND RECOMMENDATIONS

We recommend that entities incorporated or registered in Bermuda, the BVI or the Cayman Islands consider as soon as possible, whether or not they are in scope of the relevant ES Legislation. Any entity that appears to be in scope should undertake an internal review to determine if it undertakes any "relevant activity" (as defined under the ES Legislation of the applicable jurisdiction) and, if so, seek advice as to which steps it must take in order to comply with that jurisdiction's ES requirements.

Appleby has introduced an online Economic Substance Entity Classification Questionnaire (Questionnaire). The Questionnaire, which is available online free of charge, has been developed by our legal and regulatory experts and offers clear and concise guidance through the economic substance regimes of Bermuda, the BVI, the Cayman Islands, Guernsey, the Isle of Man and Jersey.

If your entity is in scope, the Questionnaire will lead you through a summary of the steps required to meet the ES requirements in the relevant jurisdiction.

While online tools are no substitute for bespoke, professional legal advice, the Questionnaire can help you make informed decisions regarding the ES requirements and how they may impact your business.

Our teams of experts with a specialised knowledge and in-depth understanding of the economic substance regime will continue to provide legal advice and support. Please get in touch with your usual Appleby contact for further information.

This article is current as at 10 September 2019. Appleby continues to monitor further amendments to the relevant economic substance regimes and will provide updates in due course.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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